Blood in the Water

In economic times like these — when everyone else is pulling back or just holding on — balls win

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"Owning a business is the loneliest thing I've ever done," says Chris McCanles, who owns the best high-end audio-visual-installation business in Wisconsin. The reason he's lonely is he's doing something almost no one else has the vision and courage to do right now: He's expanding his business.

McCanles started Terra Nova in Milwaukee in 1997, putting his years as an audio engineer to work installing awesome home theaters in mansions just as Americans drunk on cheap home-equity credit decided that viewing DVDs in leather recliners represented the height of sophistication. It worked. Terra Nova grew steadily, reaching 26 employees by the late 2000s. And then the world fell apart.

People could no longer re-fi their homes to pull out the kind of cash that home theaters require. So McCanles expanded his company into other areas. He pushed business services like teleconferencing, which appealed to companies trying to cut down on travel expenses. But he soon realized that "in a down economy, your chances of growing sales in a traditional manner are greatly reduced. Your options are stealing market share or buying market share. To steal means lowering your prices to a point where it's hard to make a profit. But acquiring a company gives you the opportunity to grow and maybe just get a bargain on a target whose owners don't have the will — or financing — to weather the downturn."

Today's brutal economy and credit freeze should have most entrepreneurs running for cover, or at least signing up for the 99 weeks of unemployment our Congress has generously provided, courtesy of our kids and grandkids. Instead, many steel-stomached small-business people are using this crisis as an opportunity to expand.

The single biggest factor in the purchase price of a business is its prior year's revenue and income. So bad times may be the best time to buy, as owners who have had a good run decide to call it a day. In this particular economy, there's an added element: Anyone with access to financing, either personal or through a strong banking relationship, will find the field clear of other suitors. Money talks like never before.

McCanles bought Ogren Electronics, a home-technology company in the part of the northern Wisconsin woods where everything looks like Deliverance. There are a lot of second homes, and people who fly up there on private planes need not only awesome home audio but monitoring systems that alert the authorities when the place is burning down.

The deal almost didn't happen because as McCanles was driving upstate to close the deal, he got word that the Small Business Administration had changed how it calculated his inventory and receivables as assets and the program funding the waiving of fees was out of money. But McCanles's long-standing business relationship with his banker smoothed out these deal killers. The result? Earlier this year, Ogren joined Terra Nova, and they're working through the cultural and business integration that is always tougher than you expect.

Investors can take advantage of this economythe same way, simply by betting on opportunistic companies. Major corporations are also cherry-picking. Nokia, whose growth had stalled while smartphone makers soaked up all of the attention, went and bought Motorola's gear business for $1.2 billion. Cash-rich Berkshire Hathaway used the recession to swoop in and buy up the three quarters of Burlington Northern Santa Fe it didn't already own. That became the most profitable part of Warren Buffett's sprawling empire. And I'm expecting Microsoft — long criticized for its failure to develop cool stuff within (its disastrous Kin smartphone lasted only two months!) — to buy something really cool like RIM. The word is opportunity.

A word epitomized by what presented itself to Baristanet earlier this year. Baristanet is a popular "hyperlocal" online community started in northern New Jersey in 2004 by Debbie Galant and Liz George. "I didn't have any grand schemes or noble goals," Galant says. "I just thought it would be fun to take the local-news model to the Internet age, give it a bloggy voice, and see if I could make some money." In June, Baristanet seized on an unexpected opportunity close to home. Baristanet had long hoped to expand its electronic borders but wondered if it could with competitors like the local Patch.com and the behemoth New York Times, which had started the Local. When the Local ceased its online life, Baristanet pounced and got The New York Times to give it the territory, a list of talented freelancers, and the most valuable component, the referral traffic.

It took the near collapse of global finance for hipster moms to realize that they were capitalists who recognized the smell of blood.